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International Journal of Wine Business Research

Italian wine demand and differentiation effect of geographical indications


Antonio Stasi Gianluca Nardone Rosaria Viscecchia Antonio Seccia

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Antonio Stasi Gianluca Nardone Rosaria Viscecchia Antonio Seccia, (2011),"Italian wine demand and
differentiation effect of geographical indications", International Journal of Wine Business Research, Vol. 23
Iss 1 pp. 49 - 61
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Italian wine demand


and differentiation effect
of geographical indications
Antonio Stasi, Gianluca Nardone and Rosaria Viscecchia
University of Foggia, Foggia, Italy, and

Antonio Seccia
University of Bari, Bari, Italy

Italian wine
demand and GIs

49
Received April 2009
Revised April 2009
Accepted January 2010

Abstract
Purpose Geographical indications (GIs) provide a strong differentiation tool for firms. Whether this
statement is confirmed at aggregate level in terms of market independence of different GIs is not tested
yet. The purpose of this paper is to provide demand estimates and elasticities (own-price and
substitution) in order to test this hypothesis and verify the differentiation effect of GIs at aggregate level.
Design/methodology/approach The analysis consists of the application of a quadratic almost
ideal demand on a four equation system. Estimates are obtained through an iterated version of a
generalized method of moments, which corrects for endogeneity determined by expenditure and prices
in case of promotional activities.
Findings Estimates prove the existence of a differentiation effect of GIs in terms of magnitude of
elasticities and substitution effects. GIs corresponding to higher quality generate lower price
sensitiveness and product substitution, contrarily to wine without GI. Controlled origin denomination
(DOC) wine demand results are price sensitive and they substitute for wines of different GI. Controlled
and guaranteed origin denomination (DOCG) is the most profitable GI. In fact, because of its inelastic
demand, DOCG price could be potentially increased, to a certain extent, without having significant
effects on volumes consumed.
Research limitations/implications Foreign wine should also be included in the demand system
in order to understand the whole Italian wine market. Data concern retail level demand. The whole
market, including hotels, restaurants and catering, should be included to offer a wider set of implications.
Practical implications Marketers and producers could use the information provided by the
estimates in order to forecast Italian wine demand. Elasticities and substitution effect provide them with a
precise measure of consumers price sensitiveness, which would be beneficial for their pricing strategies.
Originality/value The paper provides, for the first time, estimates of a demand system relative to
GI differentiated Italian wine.
Keywords Italy, Wines, Viticulture, Consumer behaviour
Paper type Research paper

1. Introduction
Geographical indications (GIs) are aimed at differentiating the origin of wines and signal
quality to consumers. Empirical and theoretical analyses highlight the effects of GIs on
agro-food product demand. Landes and Posner (1987) stated that GIs reduce confusion
and search costs, leading consumers to express strong preferences. Gil and Sanchez (1997),
Loureiro and McCluskey (2000), Skuras and Vakrou (2002), and Schamel and Anderson
(2003) have concluded that consumers are willing to pay more for a differentiated and
traditional/regional product, while Ribeiro and Santos (2007) confirmed that the positive
image/reputation of the region of origin generates strong preferences among consumers.

International Journal of Wine


Business Research
Vol. 23 No. 1, 2011
pp. 49-61
q Emerald Group Publishing Limited
1751-1062
DOI 10.1108/17511061111121407

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50

van Ittersum et al. (2007) concluded that consumers of regional products assign high
importance to labels that contain regional certification. They reported that GI labels
positively affect consumers willingness to pay, relative to the protected regional product.
Caporale and Monteleone (2001) indicated that origin information has a significantly
positive impact on virgin olive oil acceptability. Lusk et al. (2003) found that beef
consumers prefer origin labels rather than private brands.
Empirical literature on consumers wine preferences reports similar outcomes.
Ribeiro and Santos (2007) showed that region of origin is the dominant cue when
consumers and retailers select a wine for purchase. Scarpa et al. (2006) indicated that
protected denominations of origin determine positive responses from consumers and
reveal their willingness to pay, rather than reactions generated by brand, seller type,
and suggestions from producers and acquaintances. Bonaria and Pomarici (2006)
analyzed consumers preferences towards Sardinian wines, and results indicate that GIs
are the most important attributes to Italian consumers when selecting Sardinian wines.
Malorgio et al. (2008) studied consumers preferences towards wine attributes and found
that GIs positively affect the probability of choosing a certain wine and generates a
willingness to pay. Martinez-Carrasco et al. (2005), Mtimet and Albisu (2006), and
Perrouty et al. (2006) showed that the designation of origin is, in most cases, the key
attribute that affects wine price and ranking among consumers.
The economic and marketing literature on the topic presents unanimous outcomes on
the effectiveness of GI in orienting consumers preferences. Obviously, cultural/national
context and the type of product analyzed could be the source of the different quantitative
outcomes. The literature that was reviewed in conjunction with this research, therefore,
permits one to form clear expectations about the differentiation effect of GIs in the Italian
wine market.
Despite the fact that GIs have been widely discussed, there is no empirical evidence
nor quantitative evaluation that concerns the differentiation effect of GIs in the wine
market, in terms of consumers responsiveness to the price of GIs versus conventional
products, the profitability of the GIs, or the substitutability among products of different
GIs and their conventional counterparts. More specifically, the measure of
substitutability indicates how much consumption would shift to another GI typology
if the market price of another GI type changes. In fact, when consumption switches
easily from one category to another after a price increase, a natural consequence could be
a weak product differentiation.
Although latent class models are becoming popular for estimating demand due to the
convenient property with which to reduce the parameters dimensionality, they do not
allow the estimation of the whole set of substitution elasticities (Berry, 1994). On the
other hand, demand estimation, although it could be econometrically cumbersome, has
been largely applied for this purpose.
International wine literature lacks Italian contributions in which a demand system
related to wine is estimated. The only known study was conducted by Torrisi et al. (2006),
and it analyzed Italian table wine demand by estimating a linear approximated/almost
ideal demand system (LA/AIDS) brand level model. They showed that two of the main
Italian brands are close substitutes, while private label and higher table wine quality
represent differentiated product on the market. Elasticities estimates also provide
information on consumers price responsiveness, and results are lower for higher quality
wines.

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Wine demand estimation relative to new world wine markets is a more common topic
within the international scientific context. In fact, Pompelli and Heien (1991), Buccola
and Vander Zanden (1997), Seale et al. (2003), and Carew et al. (2004) estimated sourceand color-differentiated wine demands. A result common to those studies is the presence
of substitution effects among wines of different nationality, while red and white wines
rarely substitute each another.
The analysis of the highlighted literature, which incorporates a hedonic pricing model
and conjoint analysis contributions, concludes that GIs are an important
element/variable for wine differentiation and quality signaling. Contrarily, the
literature related to demand estimation has never considered wines of different GI and
non-GI wines as competing products or separable goods. An analysis that considers that
hypothesis would generate important implications for the industry and policy makers, in
terms of effectiveness of GIs in differentiating the wine market and the profitability
potential of various types of GIs.
The present study is contextualized in a noteworthy market situation in which the
European and Italian wine markets are facing a decrease in total consumption and a
modification in the preferences of consumers, who are moving towards higher quality
wines compared to the past. The shift in lifestyle towards a metropolitan stereotype,
which consists of an increasing number of meals consumed out with a reduced time at
each meal, wine consumed only in more relaxed meals or important occasions (not at
every meal as in the Mediterranean diet) and more importance to the wine choice and
matching with food, is resulting in a change in dietary habits. Wine, therefore,
is perceived as an experience good rather than the typical beverage of the Mediterranean
diet. These changes characterize a particular and important economic framework for
analyzing wine demand and understanding how consumers preferences are shifting
among wines of different quality and different GI.
The paper is organized as follows. After the introduction that highlights the most
relevant issues, reviews the literature, and proposes the objectives, Section 2 presents the
Italian wine market and the institutional context of the GIs. Section 3 describes the theory
of the quadratic almost ideal demand systems (QUAIDSs), while Section 4 describes the
data. Section 5 illustrates the empirical analysis and the results and presents the relative
discussion. Finally, implications and suggestions for further research are detailed in
Section 6.
2. Italian wine market
2.1 Wine classification through geographical indications
In 1963, the Italian legislation adopted the EU wine classification through GIs. The
development of GIs allowed the identity of quality wines of particular regions to be
protected from fraud and facilitated commercialization through wine classification and
brand recognition. In addition, the GI system is coupled with labeling regulations that
allow GI wines to signal quality with a higher level of labeled information in comparison
to non-GI wines (subsequently indicated as table wines).
GI categorization includes the controlled origin denomination (DOC), or Denominazione
di Origine Controllata; the controlled and guaranteed origin denomination (DOCG), or
Denominazione di Origine Controllata e Garantita; and the geographic and typical
indication or Indicazione Geografica Tipica (IGT). The first two appellations are earned by
adhering to a quality discipline. The designation of these appellations depends

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on recognition criteria of the wine as a traditional product, the adherence to strict


regulations that establish the production area, the grape varieties for the blend, the
wine/grapes yield, and the alcohol content (DOCG criteria include bottling rules). The
third GI, the IGT, was recently introduced in order to include several high quality wines
that could not be designated as DOC. The remaining wines, which are not special or
sparkling wines, such as spumante or champagne, are designated as table wines and do
not follow any collective quality discipline.
2.2 Italian wine production
Italian wine growing is characterized by small-size, family-owned farms. In 2005, there
were approximately 600,000 farms that produced grapes, with vineyards occupying an
area of approximately 772,000 hectares. Two-thirds of the wine grape area concerns the
production of table wines and IGTs, while the area for DOC or DOCG wines only
accounts for 36 percent. DOC and DOCG wine grapes are mainly concentrated in
northern Italy, where approximately 60 percent of the area is devoted to high-quality
wine production (Anderson, 2004; Table I).
2.3 Wine consumption in Italy
During the period 2000-2004, the volume of household consumption of wine has
decreased, on average, 2.4 percent annually, going from 9.65 to 8.57 million of hl.
Table wine consumption registered the highest decrease, approximately 3 percent, while
DOC and DOCG wines only decreased by 1 percent. Special wine consumption decreased
2.4 percent. Trends in expenditures are distinct. On average, aggregate expenditures on
wine increased by 1 percent per year, going from EUR 1.63 to 1.71 billion. This increase is
almost entirely due to the increase in expenditures for GI wines (approximately 4 percent
growth). Expenditures for table wine and special wines registered a decrease of
0.3 percent (ISMEA, 2005).
This information clearly indicates a dietary habit shift towards a more metropolitan
lifestyle. Another factor that affects this modification of the market is the change in the
consumption approach, which is becoming more experimental. Moreover, the increasing
knowledge about wine products and the increasing awareness about the beneficial effect
of the antioxidants which wine contains may have oriented consumers towards higher
quality and GI products.

Area

Table I.
Italian production
of wine per area

Italy
North
Center
South

Wine (millions of liters)


DOC and
DOCG
IGT Tablewine Total
14.79
8.29
3.49
3.00

12.59
7.31
2.02
3.25

Source: ISTAT (2006)

19.72
4.27
1.91
13.53

47.11
19.88
7.44
19.79

Percentage of cultivated over the total


wine growing area
DOC and
DOC and DOCG
DOCG
IGT Tablewine
and IGT
0.31
0.42
0.47
0.15

0.27
0.37
0.27
0.16

0.42
0.21
0.26
0.68

0.58
0.33
0.12
0.13

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3. The model: the QUAIDS


While most of the literature that was reviewed in conjunction with this study applies the
(AIDS) or its linearized version (LA/AIDS) that were originally introduced by Deaton
and Muellbauer (1980), the possibility of testing for a quadratic specification oriented
this research towards the use of the QUAIDS.
Arguing that, for many commodities, standard empirical demand models do not
provide an accurate analysis of behavior across income or expenditure groups,
Banks et al. (1997) elaborated a new demand model which is consistent with theory and
accounts for different behaviors across income/expenditure groups. Inductively, their
argument is based on the assessment of the Engel relationship. In fact, when finding a
significant quadratic specification in the empirical estimation of Engel curves, they
incorporated a second-order polynomial expenditure in the demand system which led to
the so-called QUAIDS.
In order to construct the QUAIDS, the following general form of demand is drawn:
wi Ai p Bi plog x C i pg x

for goods i 1, . . . , N, where p is the vector of prices and A, B, and C are differentiable
functions. Expenditure shares are linear in log expenditure and in another smooth
function of expenditure, g(x). This last term allows nonlinearities in Engel curves
(Banks et al., 1997). The quadratic specification begins by considering the Deaton and
Muellbauer translog price index:
X
XX
ak log pk 0:5
gkl log pk logpl
2
log P * a0
k

as well as a Cobb-Douglas price aggregator; b p

n
Y

pbi
i

i1

Finally, the share equation system is:


X


 
 2
gij log pj bi log x=P * li =b p log x=p *
wi ai

Such is perfectly nested with the more commonly used AIDS.


Theoretical calculation restrictions and homogeneity are imposed, as in Banks et al.
(1997). Elasticity calculations also follow, as specified in the paper that originally
proposed this approach.
Given the partial derivatives:

 

mi wi =log x bi 2li =b p log x=P*
5
0
1
X
 2

 
mij wi =log pi gij 2 mi @aj
gik log pk A 2 li bj =b p log x=p *
6
k

The expenditure elasticities are given by ei mi =wi 1

The Marshallian price elasticities are given by e uij mij =wi 2 dij

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where is the Kronecker delta, which equals 1 when i j:


The Hicksian price elasticities are calculated as e cif e uij ei wj

Compared to the AIDS paradigm, the QUAIDS model presents higher flexibility, resulting
in two fold implications: better performance in explaining complex Engel curve
phenomena, as expected for complex products such as wine, but cumbersome estimation.
In addition, endogeneity issues are expected to negatively affect the outcome of the
estimation if it is not corrected. In fact, in theoretical discussions, expenditure is usually
intended to be equal to income, which is assumed to be imposed on consumers from outside.
On the other hand, in empirical literature, when estimating a complete system of demand
equations under a two-step budgeting assumption, in which consumers first choose how to
allocate their income among all the categories of goods (e.g. housing and food) and then they
decide how to allocate their budget within each category (Deaton and Muellbauer, 1980), the
total expenditure is intended to be the sum of prices times the quantities purchased, or the
sum of the expenditure of the single goods. Clearly then, expenditure on the right-hand side
is jointly endogenous with the expenditures in the denominator of the shares.
When consumers purchase products that are offered at a promotional price, or at a
discounted price for club-card holders, a consumers decision to accept the promotional
activity or to use a club card does affect prices or consumer purchasing power
(Torrisi et al., 2006). Additionally, prices are also included in the share calculation on the
left-hand side of the demand equation. These reasons lead prices to be intended as
weakly endogenous. Those multiple sources of endogeneity, therefore, need to be
considered in the estimation (LaFrance, 1991).
A convenient tool that allows for the consideration of all those sources of complexity
is the instrumental variable estimator, such as 2SLS or 3SLS, which uses the information
contained in other variables, including the instruments, in order to remove the
correlation between regressors and errors and provide consistent estimates. The 2SLS
and 3SLS estimators and, in general, the maximum likelihood estimator, require strong
and restrictive assumptions about the distribution of the error. Contrarily, the
generalized method of moment (GMM)[1]:
X
X
0
1=N n wXi ; b W21 1=N n wXi ; b
moves away from any sort of parametric assumptions and handles contemporarily
multiple endogeneity, nonlinearity, and heteroscedasticity. For this reason, the GMM
estimator, when the model is correctly specified, is asymptotically more efficient than
3SLS or FIML (Greene, 2003).
4. Data: Italian homescan wine panel data
The Italian homescan panel is the collection of weekly retail purchase records of
6,000 Italian households. The panel is stratified on demographic and geographic criteria.
It is balanced on region, age of the head of the household, the age of the primary purchaser,
the number of family components, income level, and the number of children. The number
of households in the panel reflects the national demographic and geographic distribution.
Because of the sampling design and properties, ACNielsen homescan panel data can be
considered to be representative of the at-home national consumption.
Of all the products contained in the ACNielsen homescan panel, our subsample
concerns only wine products. The subsample includes all the 6,000 households

of the original panel. The information it contains pertains to the wine purchases of the
sample from 2002 to December 2005. The total information consists of wine product
characteristics, such as color, appellation, varietal characterization, organic or
conventional production, region of provenience, the production firm, trademark,
volume, packaging material, purchase date, retailer/shop, purchase amount, and the
single-purchase expenditure amount.

Italian wine
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55
5. Empirical analysis and results
The estimation of wine demand, apart from other types of beverages or goods, is feasible
when a two-step budgeting procedure is assumed. In this analysis, we assumed that
Italian households begin by deciding how much of their income they would allocate to
wine and in the second phase, they decide the quantity of each type of wine they would
purchase.
Data preparation consisted of two phases: aggregation and data-mining. As for the
first phase, we aggregated households consumption into four categories: DOC, DOCG,
IGT, and table wine by calculating quantities and averaging prices by means of a
weighted average in order to assign a heavier weight to those wines purchased more.
Aggregation over time has also been carried out. In fact, in order not to have zero
expenditure points, the original weekly data have been aggregated into two-week
observations. When such a phenomenon occurs, demand estimation should consider the
truncated nature of the sample. Lacking of explanatory variables in order to estimate a
truncated model we have chosen to aggregate data into bi-weekly observations. Monthly
aggregated data, on the other hand, would reduce enormously the variability occurring
on a shorter time-period (Figure 1).
Referring to the second phase of the data preparation, the shape of the series has been
checked in order to depict the seasonal patterns. Our analysis revealed that prices do not
show any seasonal patterns or reflect a high variability, while quantities show a typical
seasonal pattern and a high standard deviation. Since promotions are positively
correlated with consumption, they have been included in terms of proportion of wines
purchased at each time. They have not been considered as price shifter because not all
promotions reduce the price, most of them, in fact, consist of better display on the shelves
or gadgets given with a bottle of wine. Moreover, in order to account for the sawtooth
behavior and the specific seasonal pattern of high values during Christmas and low
700
600
500
400
300
200
100
0
2

0
eb-

-02

Jul

c-0

De

y-0

Ma

DOC

t-0

Oc

r-0

Ma

DOCG

g-0

Au

IGT

-05

Jan

Table

-05

Jun

v-0

No

Figure 1.
Wine consumption
time series

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values during the summer, the variables sinp=13, the paycheck dummy at the end of
each month, since Italians receive their paychecks on the 27th of each month, and the
Christmas holidays dummy were also included in the model.
Data show that the most-purchased wine is the DOC, followed by the IGT. Table wine
is purchased least often. The proportion of wines sold under in-store promotional
activities is substantially high for DOCG and table wines. As expected, table wine shows
the lower average price, while the DOCG is the most expensive (Table II).
The instruments employed in order to correct for endogeneity include the contractual
level of wages; the individual price indices for all goods, food, and wine; the lag version of
prices; the lag of the logarithm of prices; and the monthly index for gross domestic
product and other endogenous variables uncorrelated with the error, such as the
sinp=13, the seasonal dummies, the stone index, and various combinations of those in
terms of cross-products.
Finally, we scaled price data to the median and established the estimation. Estimation
has been carried out by means of an iterated version of the GMM in which the parameters
obtained at the first run serve as starting values for the second run. Estimation
concludes when parameters of the last step equal those estimated in the previous step,
plus or minus a tolerance values.
Estimation has required eight iterations to reach the convergence. Endogenous
regressors have been significantly over-identified (e.g. the J-test). The auto-correlation
phenomenon does not occur in any of the series, as shown by the Durbin and Watson
tests. Finally, the R 2, although just indicative of a system of equations, shows that the
model specification has facilitated an explanation of the data variability well above
26 percent (Table III).
Estimates of the system, although not directly interpretable for quantitative
evaluations, provide a rough evaluation of wine demand differentiated by GIs through
the interpretation of their signs. Price increases for IGT and table wines correspond
to increases in DOC wine shares and decreases in DOCG, IGT, and table wine shares.
This result confirms the strong diversification among DOCG, IGT, and table wines, but
also the scarce differentiation of DOC wines, which could show strong substitution with
the other categories. Substitution among GIs is expected, especially between DOC and
DOCG and DOC and IGT, because they could be closely related in terms of quality.
Variable
Quantity (liters/two-week)

Price (euro)

Table II.
Sample descriptive
statistics of bi-weekly
national data

Promotions (proportion of wines purchased under


promotional activities)

Average

SD

Min

Max

DOC
DOCG
IGT
Table
DOC
DOCG
IGT
Table

318.23
54.03
83.82
19.49
3.48
5.92
2.80
1.46

143.46
34.08
63.79
18.28
1.50
2.79
1.45
0.89

103.25
10.50
15.00
1.50
0.25
0.61
0.14
0.04

976.25
166.50
286.50
80.00
48.00
50.67
16.00
21.30

DOC
DOCG
IGT
Table

0.31
0.03
0.16
0.49

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Dependent varriable
Variable
Intercept
log DOC price
log DOCG price
log IGT price
log table price
Expenditure term
Seasonality
Christmas holiday
Monthly paycheck
Promotion
Quadratic
R2
Durbin-Watson test
J-test

Equations (symmetry, homogeneity, and adding-up imposed)


DOC-share
DOCG-share
IGT-share
Table-share
Coef.
SE
Coef.
SE
Coef.
SE
Coef.
SE
2 4.139
1.315
2 5.872
3.222
0.956
0.505
2.354
1.549
2.563
1.597
1.349
0.331
2 0.010
0.014
2 0.051
0.026
2 0.003
0.013
0.001
0.000
2 0.097
0.022
35.010
2.181
112.675 (DF 78)

0.939
a
2 0.074
2 0.465
2 0.417
2 0.230
0.016
0.058
2 0.003
0.001
0.015
26.710
1.832

0.999
0.011
0.538
0.228
0.199
0.011
0.021
0.010
0.001
0.022

2.144
a
a
2 0.798
2 1.091
2 0.562
0.002
0.008
0.015
0.003
0.041
54.210
1.808

0.857
0.092
0.702
0.247
0.009
0.018
0.009
0.001
0.018

2.056
a/b
a/b
a/b
2 1.055b
2 0.558b
0.986b
0.986b
0.991b
0.995b
0.041b

Italian wine
demand and GIs

0.938

57
0.746
0.234
0.020
0.020
0.010
0.001
0.014

Notes: aNot estimated because of symmetry restrictions; bparameters retrieved through homogeneity
and adding-up restrictions

Substitution between DOC and table wines, on the other hand, could correspond to a
reduction in DOC reputation. In fact, the increase in the number of DOC wines on the
market could have influenced consumer perceptions of those wines as being niche and
high-quality products.
A certain degree of consumption sensitivity to price variations was noted. Generally,
demand is downward-sloping for all the four wine categories which were analyzed. This
result indicates that price promotions or heavier taxation could effectively modify the
level of wine consumption. In fact, there is an ongoing debate at the European level about
the imposition of excises on the Italian market. Excises are volume-based taxes,
so expensive wines are, in proportions, less levied than cheap wines. The taxation should
reduce consumption and abuses of alcoholic beverages.
As the total expenditure for wine increases, the DOC market share increases.
Contrarily, IGT and table wines are consumed less when consumers allocate more money
to wine in general. This last result confirms the big scale trends that reveal an increase in
total wine expenditure but also a reduction in lower quality wine consumption, opposed to
the increase in DOC/DOCG wine demand.
Estimates show that, with the exception of DOC wines, consumption generally
increases at Christmas. Furthermore, the monthly paychecks elicit an increase in IGT
and table wine consumption. As expected, in-store promotional activities generate an
increase in consumption for all of the selected categories. Finally, the significance of the
quadratic term confirms that the QUAIDS is the preferred specification against the
AIDS or the LA/AIDS models.
Quantitative implications could be depicted by interpreting the own- and cross-price
elasticities, which are calculated using the estimated parameters and referring to a base
situation[2]. Hicksian elasticities have been calculated since they provide estimates that
are purified by the income/expenditure effect, compared to Marshallian elasticities[3].
Therefore, they could be considered reliable measures for drawing quantitative

Table III.
Estimation results

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58

implications about price responsiveness of demand, substitution among the GIs, and
GI-related profitability and differentiation effects.
The elements on the main diagonal presented in Table IV are own-price elasticities,
which represent the percentage variation of the market share of a specific wine as a
consequence of a 1 percent increase in its price. For instance, a 1 percent increase in table
wine price elicits a 7.7 percent decrease in market share. Similarly, a 1 percent increase in
DOCG price elicits a 0.8 percent decrease in DOCG share.
Own-price estimates show that DOC, IGT, and table wine demands are elastic, while
DOCG wine demand is inelastic. Generally, own-price elasticities could be related to the
quality perceived by consumers. When quality is perceived as low, a price increase would
lead to many consumers reducing or ceasing to consume that product or switching to
higher quality products. The demand of this kind of product would be elastic. High quality
and highly differentiated products, on the other hand, satisfy specific consumers needs.
As consequence, we expect those products to show inelastic demand and generate a high
level of loyalty.
DOCG wine demand, in fact, is inelastic. A price increase, in this case, would elicit a
less than a proportional reduction in market shares. This result leads to the conclusion
that DOCG wines are highly profitable because producers/sellers could increase their
prices above marginal costs without having significant and negative effects on their
market shares. Being demand-inelastic, price promotions on DOCG wines do not
generate significantly higher sales. This result justifies the higher incidence of
promotions for this category in order to sell out the stocks.
Contrary to DOCG wines, the demand for DOC, IGT, and table wines are own-price
elastic. An increase in their price would more than proportionally reduce their
consumption. In consequence, those wine categories show low margins of profitability
because, in order to maintain a high level of sales/consumption, prices should be set as
low as possible. Conversely, a decrease in their own-price would generate a more than
proportional increase in their demand. Clearly, prices could be reduced to the extent of
marginal costs being lower than prices. Among the wine categories that could be
advantaged by a price reduction or a promotion, as for our results, table and DOC wines
would exploit this opportunity the most because of their highly elastic demand. In fact,
contrarily to DOC wines, the high level of table wine sold under promotions is a sign that
producers of table wine are already using this strategy.
Looking at cross-price estimates, represented as out-of-diagonal elements in Table IV,
we noticed that there are clear and significant substitution effects among DOC and other
wines, especially IGT and table. Substitution indicates a scarce differentiation among
DOC wines and other GIs, but also between DOC and table wine. In fact, an increase
Price
DOC
Quantity

Table IV.
Hicksian/substitution
elasticities at the base
situation

DOC
DOCG
IGT
Table

2 5.418
1.019
2.732
2.722

(3.814)
(0.026)
(1.369)
(0.906)

DOCG
a

2 0.844 (0.368)
2 2.827 (4.774)
2 2.229 (1.743)

IGT
a

a
22.317 (1.891)
22.454 (1.359)

Table
a
a
a
27.769 (2.704)

Notes: aSymmetric demand at base prices consists of symmetric price responses; SE by means of
delta method

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in DOC price would elicit a reduction in DOC consumption and direct consumers
towards other GIs or table wines. While the DOC and other GIs could effectively cause
confusion among consumers which, in turn, could result in substitution effects that
indicate a scare differentiation, the substitution between DOC and table wines could be
associated with the ongoing loss in reputation of this typology of wines.
Complementarity, which is opposed to substitution, has been found for the DOCG,
IGT, and table wine categories which result in high differentiation from one another.
This outcome, contrary to the hypothesized confusion of consumers when facing
different types of GIs, confirms the effectiveness of GIs as a differentiation tool and
justifies the segmentation of the market into these categories for policy and managerial
purposes.
Finally, the changes in consumers tastes towards higher quality and more
expensive wine products could be justified by the demand price responsiveness.
As prices increase, consumers tend to keep consuming high-quality wines, such as
DOCG, and avoid presumably lower quality wines, such as table varieties. For the
same reason, those results are consistent with the increase in total wine expenditure
that is currently happening in the market.
6. Discussion and conclusions
This study assesses that, indeed, appellations generate a strong differentiation effect.
As a result, wines of competing GIs generate independent demands and consumers
preferences within the Italian wine market. Another result of the GI system is that
non-GI wine demand remains differentiated from the rest of the market. The obvious
conclusion concerns the effectiveness of the GI differentiation system, which allowed
consumers to develop independent demands. In such a differentiated market, producers
of a specific GI are able to develop their strategy without taking into account the
strategies of the other wine typologies. With access to this information, producers and
marketers could draw important implications because they would use at their advantage
the information of operating in a differentiated market. As different wine typologies
show independent demands, promotional activities could also be decided independently.
When two products substitute each other, promotional activities of one player clearly
negatively affect the market shares of the others.
A different behavior concerns DOC wines. The growing number of wines belonging
to this group probably moved consumers to consider those wines from niche products to
quasi commodities, with negative effects on the image/reputation of this wine
typology. Policy makers, in this regard, should promote a set of activities aimed at
the re-evaluation of DOC wine reputation or a reconsideration of the wines that affect the
image of the DOC branding strategy into this category.
Future research should provide a more in-depth view in which wines are
differentiated by price ranges and by color as well as GI. Moreover, the relationship
between foreign wines and Italian GIs should be understood in order to evaluate whether
domestic and imported products are differentiated from one another. More
disaggregated data could be used in order to understand regional differences. Data
concern retail level demand. Thus, the whole market that includes the hotel restaurant
and catering sales, should be considered for providing implications relative to the entire
market.

Italian wine
demand and GIs

59

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23,1

Notes
1. The P GMM
estimatorP
follows
1=N n wXi ; b0 W 21 1=N n wXi ; b

the

following

specification:

2. Promotions 0; Christmas holidays dummy 0; paycheck dummy 0; log median scaled


prices 0.
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60

3. Marshallian and expenditure elasticities are available under requests to the authors.

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About the authors
Antonio Stasi, MSc, PhD, is an Associate Researcher in Agriculture & Resource Economics,
University of Foggia, Foggia, Italy. Antonio Stasi is the corresponding author and can be
contacted at: a.stasi@unifg.it
Gianluca Nardone, MSc, PhD, is a Professor Emeritus, Agriculture & Resource Economics,
University of Foggia, Foggia, Italy.
Rosaria Viscecchia, PhD, is a Researcher, Agriculture & Resource Economics, University of
Foggia, Foggia, Italy.
Antonio Seccia, MSc, is an Associate Professor, Agriculture & Resource Economics,
University of Bari, Bari, Italy.

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